Colonial may face class-action suit

Colonial BancShares is facing at least six lawsuits alleging that the bank purposefully didn’t disclose pertinent material when it announced it had been declared eligible for federal bailout money.

Lawyers said a Watergate-like litmus test of what the bank knew and when the bank knew it will determine what, if anything, the bank has to pay in settlements or verdicts.

The suits, all seeking class-action status, claim the bank defrauded investors by not disclosing that Colonial needed to raise $300 million in capital before it could receive the $550 million in bailout money.

Colonial disclosed its preliminary eligibility Dec. 2, 2008, and disclosed the capital requirements Jan. 27. The suits claim all stockholders who bought shares between those two dates as the harmed class.

Jay Aughtman, a partner at Montgomery’s Beasley Allen law firm, said getting the case certified as a class-action suit will be a difficult process, but one that could prompt Colonial to settle.

Beasley Allen is not representing clients in these cases but has been involved in similar suits.

“Proving a class requires lawyers to prove allegations are common,” he said.

These suits seem to be meeting that level of proof, he said, because they clearly define the class by action and time frame.

Aughtman said that process is complex, but not nearly as difficult as proving the merits of the argument.

“It can be a long, tedious process and very expensive,” he said.

David Guin of the Donaldson & Guin law firm in Birmingham filed the latest of the six suits this week. He said the filing of multiple suits is something of a formality. If the court accepts the class, it likely will hear only one suit.

“The court will consolidate it into one case and then choose the lead plaintiff,” he said.

The plaintiff with the greatest dollar cost likely will be the lead plaintiff.

Once that happens, according to Aughtman, a settlement is likely, unless a court finds the claims completely without merit.

He said 95 percent of all class-action suits settle before going to a jury and was hard-pressed to remember the last time he was involved in a class suit that went to a verdict.

Guin said his case was a straightforward example of corporate fraud, but Aughtman said cases of that nature rarely are straightforward.

“They have to prove it was intentional conduct to withhold that information,” he said.

“If those elements can be proven, then plaintiffs have cleared a couple of hurdles.”

Even then, the plaintiffs still have work to do to collect a judgment.

“They have to prove they suffered damages, and that it was the result of the omission,” he said.

Aughtman said the stock market’s general decline will likely lead to more fraud suits because more investors will lose money and consider legal action.

“The conditions will cause them to seek legal advice,” he said.

According to a report by NERA, an international economic research firm, there were more class-action lawsuits related to securities in 2008 than in any year since 2002.

Colonial declined to comment on the lawsuits.

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